Dollar flat vs. euro after stronger ISM

Yen rallies on revived hopes for a rate hike in December

By

WanfengZhou

NEW YORK (MarketWatch) -- The dollar traded little changed against the euro Tuesday, as traders weighed mixed data on the health of the U.S. economy and inflation and await a key employment report due later in the week.

The greenback rebounded from session lows after the Institute for Supply Management said its ISM service index rose to 58.9% in November from 57.1% in October. It is at the highest level since May. Economists had expected the index to fall to 55.8%. The report comes after data last week showed the ISM factory index contracted for the first time since April 2003. See full story.

The ISM services data suggested "that the broader economy remains quite robust and is in fact improving over the most recent months, suggesting a stabilization at the minimum and perhaps the much awaited rebound from [third-quarter] weakness," said Brian Dolan, director of research at Forex.com, a division of Gain Capital. The dollar is "getting some legs here after a delayed reaction."

Late in New York, the dollar was quoted at 114.83 yen, compared with 115.33 yen late Monday, after dropping to 114.41, the lowest level since Aug. 7. The euro changed hands at $1.3323, from $1.3325.

The British pound traded at $1.9735, compared with $1.9796. The dollar changed hands at 1.1912 Swiss francs, compared with 1.1941 francs.

Traders look ahead to U.S. nonfarm payrolls data due Friday at 8:30 a.m. Eastern. Payrolls are expected to rise about 110,000 for November after a 92,000 gain in October, according to a survey of economists conducted by MarketWatch. See economic preview.

Overall, sentiment towards the dollar "is unchanged but the dollar has already fallen a long way and there is some caution" ahead of the European Central Bank meeting Thursday and Friday's employment data, said Marc Chandler, global head of currency strategy at Brown Brothers Harriman.

Inflation recedes

Earlier, the dollar fell briefly after a government report showed inflationary pressure from rising wages aren't building as fast as previously estimated. The Labor Department said unit-labor costs -- a key measure of inflationary pressure from a tight labor market -- were revised much lower in both the second and third quarters.

Instead of rising at a 5.3% pace in the past year, unit-labor costs in the nonfarm business sector were revised to a much-tamer 2.9% annual pace.

Productivity in the nonfarm business sector rose at a 0.2% annual pace in the third quarter, revised from no gain previously reported. Economists had expected productivity to be revised to 0.4% growth. Unit-labor costs, meanwhile, were revised to a 2.3% annualized growth, from 3.8% previously. See full story.

The Fed is expected to keep its overnight interest-rate target at 5.25% at its meeting next week. Investors and analysts are looking for the Fed to cut rates in March or May, but Fed officials have expressed very little concern that economic growth is fading too fast.

'Hike as soon as December'

The yen gained across the board, touching a four-month high against the dollar, after comments made by Bank of Japan officials reignited hopes the Japanese central bank would raise interest rates this month.

Bank of Japan policy-board member Atsushi Mizuno said the central bank may raise interest rates despite weaker economic indicators. "Some recent economic indicators have been unfavorable. But it's not like we can't raise our policy rate unless all economic indicators prove to be strong," Mizuno was quoted by Dow Jones Newswires as saying in a speech.

Meanwhile, BoJ Governor Toshihiko Fukui said that Prime Minister Shinzo Abe had not made any specific request regarding monetary policy.

Comments from Japan overnight "radically altered market's perception of the likelihood of a December rate hike by the BoJ and put a solid bid underneath the yen," said Boris Schlossberg, senior currency strategist at FXCM.

Expectations for faster appreciation of the Chinese yuan ahead of a visit by Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke to China next week also helped support the yen, analysts said. The Japanese currency is often viewed as a proxy for the yuan.

Canada keeps rates steady

Elsewhere, the Bank of Canada on Tuesday left its benchmark overnight rate unchanged at 4.25%, as widely expected.

The Bank said inflation has evolved "broadly in line" with expectations and reiterated that "the current level of the target for the overnight rate is judged at this time to be consistent with achieving the inflation target over the medium term."

Ryan Brecht, an economist at research firm Action Economics, noted that although recent developments have heightened the downside risk to the U.S. economy, "elevated Canadian inflation, still solid domestic demand and a lackluster productivity outlook suggest that BoC will remain on hold through the first half of 2007."

The Canadian dollar, also known as the loonie, last traded flat at C$1.1405 versus the greenback.

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